Balance in the oil market depends on more than continued management of supply by the Organization of Petroleum Exporting Countries and cooperating exporters. So far, however, supply receives most attention.
Second-guessing has begun of the Joint Ministerial Monitoring Committee’s Sept. 23 understated committal to keep the market balanced by urging “countries with spare capacity to work with customers to meet their demand during the remaining months of 2018.” By that, the JMMC means Saudi Arabia, the United Arab Emirates, Kuwait, and Russia will compensate for Iranian export declines as renewed sanctions squeeze the Islamic Republic, as well as for whatever further shortfalls beset Venezuela and Angola, OPEC’s distressed parties to the December 2016 agreement to coordinate production.
Iran’s warning
Before the JMMC’s latest meeting, Iran warned against offsetting production increases. But OPEC and its collaborators will continue managing supply to balance the market as long as participating production leaders see economic advantage in doing so. They’re already looking beyond 2018. The JMMC directed the Joint Technical Committee to develop “options on 2019 production levels to prevent market imbalance.” Absent geopolitical disruption, compliance with the 2016 agreement seems likely to remain strong unless demand, the other factor of balance, falls enough to erode benefits to key producers of supply restraint.
Chances for a demand swoon are, in fact, greater than usual. Demand for oil tracks the global economy, which faces new uncertainty from an escalating trade war.
In articles published Sept. 17 and 24, analysts from the Peterson Institute for International Economics (PIIE) assembled a useful scorecard for tariffs imposed this summer by the administration of US President Donald Trump and retaliating target-countries. Here’s a summary:
On June 1, the US set new tariffs on $48 billion/year worth of metal imports from Canada, Mexico, and the European union, extending earlier restrictions on imports of steel and aluminum from China, Russia, and other countries. It based these actions on a finding that the affected imports threaten national security. Canada, Mexico, the EU, China, and Turkey responded with new duties on goods from the US.
On July 6 and Aug. 23, the US implemented a first round of levies on imports from China, acting under a statute addressing unfair trade in technology and intellectual property. On Sept. 17, it announced a second round of tariffs against China, which had responded with its own tariffs to the July and August moves and said it would do so again. The first two phases of US tariffs targeted imports worth about $250 billion. Trump has threatened a third phase affecting imports worth about $267 billion, essentially the rest of Chinese shipments of goods to the US.
To ease the retaliatory blow to US farmers, the administration offered new agricultural subsidies totaling as much as $12 billion, payments of which began in September. Also during the summer, the administration began an investigation that was expected to determine, like the one on aluminum and steel, that US imports of automobiles, trucks, and auto parts threaten national security and warrant tariffs. Most of such US imports, worth about $350 billion, come from the same allies hit by the metal duties.
In the Sept. 24 PIIE comment, Chad P. Bown, Euijin Jung, and Zhiyao Lu said Trump as of that date, when the second round of tariffs against China took effect, had imposed trade restrictions on 12% of US imports during 2018. Combined trading-partner retaliations cover more than $125 billion, or 8%, of US exports.
The threat grows
Retaliation hurts specific US businesses. The oil and gas industry, for example, faces rising steel prices and a new Chinese tariff on US LNG. The whole US and global economies, however, so far show little strain.
The threat of a trade-related slowdown nevertheless grows with time and each new round of tariffs. It’s a risk, which shouldn’t be ignored, to growth in oil demand and therefore to the market balance essential to revival of the oil-producing industry.